Town Square

California Budget Myths

Original post made
by stephen levy, University South,
on Jul 8, 2010

State leaders have acted as usual to make state budget decisions in secret with the only access to the public is through the posturing that both parties put forth. So even though state budget decisions are important for Palo Alto residents I wouldn't blame anyone for not paying much attention to the threats and political posturing that passes for "tough budget choices".

However, some of the allegations about budget numbers are so far off base I thought I would make up a short quiz for any interested readers.

Question 1--Is California Like Greece

Greece's current budget deficit is 9.9% of their GDP. In the U.S. the current budget deficit is 9.4% of GDP. For California the budget deficit (around $18 billion) is what percent of our economy

a) 1%
b) 4%
c) 7%
d) 10%
e) 12%

Question 2--Does CA have too many state employees

The U.S. average for state employees per 10,000 residents is 143. Texas has 119 employees per 10,000 residents. California has

a) 103
b) 120
c) 140
d) 160
e) 180

Question 3--Is State Budget Spending Out of Control

In 1994 at the end of the long recession California allocated 5.7% of residents' personal income to General Fund spending. At the height of the dot.com boom the share was 7.0% and in 2007 the share was 6.6%. In the Governor's proposed 2010-2011 budget the proposed spending as a share of 2010 income is

a) 5.2%
b) 5.8%
c) 6.2%
d) 6.8%
e) 7.3%

The answers are "a" in each case. If you want to read the details you can read them below.

Posted by Paul Losch
a resident of Community Center
on Jul 8, 2010 at 2:58 pm

Steve,

Useful information. A question and an observation:

1. Your Question 3 addresses the reality of State spending. Will you please provide similar metrics on State revenues using a similar methodology and also on a per capita basis?

2. I guess I, and maybe others, get increasingly cynical about our Sacramento politicians as the years go on. Your factual presentation will, in IMHO, would be brushed off by those in the Assembly and State Senate for whom those facts are an "inconvenient truth."

3. One additional observation: much of the spending in the State, as you know, is due to propositions and other voter mandated programs passed through votes of the people via Propositions on various ballots over the last umpteen years.

By constitutional mandate, the California state budget MUST be balanced. In other words, the correct answer should be 0%, and your comparisons are nonsensical and meaningless. Imagine what the percentage would be if there was no such consitutional mandate? 20%?

One pertinent question you might have asked is: How do the CA bond ratings compare to other states? I will skip the mulitple choices and cut to the chase. The answer is that we have the worst bond rating in the nation, according to Moodys.

You could have also asked about the cost of doing business in CA.

"Among the points mentioned by the Regional Economic Development Corp. official :

California's top income tax is 10.55%; Colorado's is 4.63%
California's top corporate income tax is 8.84%; Colorado's is 4.63% based only on sales within Colorado
Colorado's worker's compensation insurance costs 25% what California businesses pay" Web Link

Note that a number of companies are moving to Colorado from CA.

"Over the past 10 years state spending from state sources has more than doubled in nominal terms (not adjusted for inflation), and during the current governor's tenure state spending from state sources has risen almost 40 percent" Web Link

You forgot to mention the unfunded mandates for CA pensions and Medicaid. How convenient. Basically, your little quiz is the typical smoke and mirrors of the tax-and-spend mentality.

I suggest that you contact Moodys and ask them why they have downgraded CA, if the scenario is so rosy.

"Imagine what the percentage would be if there was no such consitutional mandate? 20%? "

What is this "percentage" that you so shrilly refer to?

"we have the worst bond rating in the nation, according to Moodys"

Isn't that the same Moodys that routinely created toxic assets on demand for Wall Street by assigning top ratings to the worst junk mortgages? Why should we take their ratings seriously here? Or take seriously anybody who takes Moodys seriously?

These blogs thoroughly demolish the myth of Palo Alto as a highly intelligent town.

Posted by stephen levy
a resident of University South
on Jul 10, 2010 at 2:26 pmstephen levy is a registered user.

A couple of posters have asked or made assertions about budget numbers.

Addressing the state budget challenges--both long and short term has not been easy for legislators or for residents who hold different and sometimes self contradictory views (don't cut services, don't raise taxes.

But budget arithmetic is easier.

Richard says that state spending more than doubled in the past ten years. If you pick his years 1997-2007 the increase was 95% -- almost double. REpublican legislators regulalry cite data ending in 2007.

But if you take the real last ten years (2000-2010) teh icnrease in state General Fund spending according to the Governor's budget documents is 7%-- a far cry from "doubling".

Whether or not you thought spending was "too high" in 2007, it has since fallen by $20 billion and currently the state is spending 5.2% of residents' income on state services, the lowest share since 1972.

So right now the idea that the state has a "spending problem" IS a myth according to the latest budget data. The state has a recession problem now.

When the economy recovers and temporary tax increases and budget gimmicks are gone (hopefuly), the state will have a large structural deficit left over from boosting spending and cutting taxes based on peak dot.com revenues that were not sustainable.

There are some long-term changes that would help including changes in retirement benefits for public employees but the savings are smaller than talked about and will not be large in any event for 5 to 10 years. I will write about some budget balancing ideas next week.

Ultimately residents will have to decide whether the current spending provides the kind of state services they want or whether they are willing in some form to raise revenues as the economy recovers, perhaps with a new tax on carbon or by using the AB 32 auction revenues to help the General Fund.

Paul Losch, the revenue data is much like the spending data. Revenues as a share of state income were 5.8% in 1994 and 5.5% in 2009 (both recession years) while they averaged 6.6% for the 1994-2009 period. 2010 is an unusual year in the Governor's budget as he plans for revenues to be $8 billion higher than spending to pay off deficits from 2008 and 2009 budgets.

States have to balance their budgets at least in theory so the revenue and spending shares of the economy will be similar.

The real point is that both spending and revenues are choices made by legislators and residents/ There is no law of budgeting that says tax rates and spending can never be changed upward or downward.

That's why the "we must live within our means" is meaningless. It says the current tax rates are perfect and we must spend only what those rates bring in. Yet legislators and residents through ballot initiatives are always changing tax rates and therefor spending capability.

So in the end all of this comes down to what we think is best for the state, for the economy, for the quality of life and for the safety net.

Posted by stephen levy
a resident of University South
on Jul 10, 2010 at 2:32 pmstephen levy is a registered user.

And remember that our state budget deficit is only 1% of residents' total personal income--a far cry from the 10% of GDP deficits the nation and Greece are facing.

That a 1% solution is all that is needed has not seemed to make choosing easier but that shows our problem like so many others these days is made much harder by partisanship, name calling and blame--when what we have is the aftermath of a brutal recession and residents who mostly want the other man/woman to pay more or have fewer services so they don't have to be part of the budget solution or the Medicare solution or the Social Security solution.

"Richard says that state spending more than doubled in the past ten years. If you pick his years 1997-2007 the increase was 95% -- almost double. REpublican legislators regulalry cite data ending in 2007."

Mr. Levy, I will leave it to you if want be inclusive of the "0" year in the decadal count (I was taught not to, because that makes 11 years in a decade, not ten). Regardless, your statement, "But if you take the real last ten years (2000-2010) teh icnrease in state General Fund spending according to the Governor's budget documents is 7%-- a far cry from "doubling"" is ridiculous on its face. By my caluclation, and using the years 2000-2009 (ten real years, not eleven), the increase is 96% (not 7%). You can define any ten year period you want, but 7% is a real crock. The palapble point is that CA is spending beyond its means, even if adjusted for population and inflation. Those days are now over. What are you going to do, Mr. Levy, given that more stimulis is not going to happen?

don't know if it was your intention, but a casual read of your quiz and the answers might make one think everything is really OK-and we should not be worrying.

Instead, here is what I think-
1. if we were close to what Greece is there would be zero hope. But we are moving in that direction and this is the time to stop it.
2. the real issue is not how many state employees, but rather what are they actually producing in terms of needed work, and what do they cost us. We pay way, way too much for too little, even by government productivity standards.
3. The percent taken from e citizens' pay for state spending is an average. Some are paying a whole lot more, and some none at all.

And it is not a good measure anyway. It is how useful the results of the expenditures are that matters. We waste a ton of money.It's sort of like here in PA where we spend an incredible amount but the streets and other infrastructure are in many cases third world condition.

Posted by stephen levy
a resident of University South
on Jul 13, 2010 at 3:26 pmstephen levy is a registered user.

There are people posting on Town Square and elsewhere who think the numbers don't matter. There is a steady chorus on "we are spending too much and government wastes all our money".

The point of the budget myth topic is to allow people who do care what the spending trends are to see the actual budget numbers.

The 2010 budget numbers are very important becasue that is what the Governor is proposing for the budget now under discussion. The General Fund budget is the one legislators vote on and the one talked about by candidates. We spend roughly 50% of education, 30% on health and social services, 10% on state prisons and another 10% spread around.

To Richard who said my statement that General Fund spending would go up by 7$% over the past 10 years under the Governor's proposal was a "crock" I invite you to go the budget pages on the DOF website and decide whether you are interested in a wager.

Other readers can join in as to whether the 7% assertion (counter intuitive but true) is a "crock".

It is disheartening to hear people talk about the state budget without acknowledging the $20 billion decline in spending in the past three years.

Last month the Census Bureau released 2007-2008 state spending per pupil and in relation to income. CA was below average on both counts despite being a high housing price/cost of living state. And in today's WSJ there was a chart showing that CA has below-average Medicaid costs per beneficiary. And this was before the recession.

In terms of schools we are in the bottom 10% of states in teachers, counselors, nurses and librarians per pupil.

Thes facts do not tell us the answer to how to balance the budget but they are important facts to many people and,w hile not making solutions easier to find, do contradict the CA spending is out of control rhetoric unchanged while state spending went from $103 billion to a proposed $83 billion.

According to the California Dept. of Finance, California spent $222 billion in FY 2009-2010. This compares with $138 billion in FY 2000-2001. These figures include the federal funds which are given to this state to spend. Mr. Levy conveniently fails to to include these funds in his missives. Basically, federal funds have continued to increase, even as the state general fund flucuates. One big exception will be this coming year, where a reduction in federal funds will actually cause an overall decline in spending. ( Web Link )

If the public pension payouts are included, then my previous data are correct, although they do not include the federal funds spent.

The FY 2010-2011 expenditures will be about $25-30 billion more than they were five years ago. In the past few years CA went on a spending spree...now the chickens have come home to roost.

Mr. Levy wants us all to agree to pay 1% of our incomes to close the current state budget gap. This means that a family of four, making $100k per year will pay an additional $1,000 to cover the egregious overspending of the state legislature. Won't happen.

Posted by stephen levy
a resident of University South
on Jul 16, 2010 at 3:25 pmstephen levy is a registered user.

Richard,

You found a good table but you are not interpreting it correctly.

If you are worried about state legislator's behavior it is the General Fund that they control and debate.

Your table agrees with the data I showed earlier that proposed General Fund spending has declined by $20 billion in recent years and has not growm much in the past ten year. So legislative spending has been reigned in (for better or worse) by the recession.

You then raise a reasonable point about the growth in federal funding. The table you cite shows federal funding growing from $41 billion in 2000-01 to $82 billion proposed for 2010-11. These are roughly the same totals I see.

But there is less here than meets the eye besides the obvious point that this has nothing to do with state legislator's decisions about spending and taxing in California.

First as you note federal funding is slated to drop in 2010-11 and will drop again in the following year.

That is because almost all of the increase in federal funding is the result of the recession and temporary federal stimulus programs.

To take the largest two examples:

1) Federal funding for unemployment insurance benefits went from $6B to $26B in 2009-10 and will drop to $19B in 2010-11 and drop more in the following year as federally paid extensions of unemployment benefits run out for workers.

2) Federal payments for Medi-Cal went from $15B to $32B as a) health care costs surged despite benefit cuts and b) the federal government in the stimulus program agreed to cover a higher share of Califoria's Medi-Cal obligation.

It is hard to argue that either piece of federal funding is bad policy and hard to argue that it is the fault of state legislator's or has anything to do with "chickens coming home to roost".

If you take the temporary stimulus spending out there is no surge in federal spending and no surge in state spending at all.

To show two other examples:

Federal funding for higher education went from $5.5B to $5.8B over the past ten years and federal funding for K-12 went from $4.5B to $7B. Most of this money goes to prescribed purposes such as school lunch programs and, again, has nothing to do with the current debate over the California General Fund budget.

I agree that public employee retirement benefits need a new social contract to be more in line with the changes in private sector programs but the current allocation for retirement funding in the state budget is less than $5B so pensions and health benefits are a very important subject for quick action but not a solution to today's budget challenges.

The blame stuff gets tiring. Recessions are a difficult time for all and CA must make hard choices re the budget such as whether it is good policy to cut education funding more but that doesn't mean there is blame. Sometimes life is just tough without there being a guilty person.

"If you are worried about state legislator's behavior it is the General Fund that they control and debate."

I am indeed worried about our legisltors' behavior. The way I see it is that they pretend to hold the General Fund stable, then go off lobbying to Washington, D.C. for bailouts to cover their ever increasing spending. A quick look at the table I provided shows that more and more of our state spending is due to federal dollars.

They will finally need to make some real cuts, because the federal bailouts are not going to cover the debt caused by overspending. It is even a bit worse than it looks, because CA currently gets fewer federal dollar back than it contributes to the feds.

The proper way to look at CA spending is to calculate the total taxes spent in CA to cover programs that purport to "benefit" the state. By this measure, CA spending has been increasing faster than population and inflation, and by a significant margin. Pick any decade you wish for comparison, Mr. Levy.